McKennon Law Group, Author at McKennon Law Group

McKennon Law Group PC is proud to announce its partnership with Soles4Souls to Fight Poverty One Pair of Shoes at a Time.We issued the following press release today, which can also be found here.

NEWPORT BEACH, CA (PRWEB)JUNE 26, 2017—McKennon Law Group PC, a top law firm that represents policyholders in their insurance disputes with insurers, is hosting a summer shoe donation drive in honor of Soles4Souls’ “Go Green” initiative. New or gently worn pairs of shoes can be dropped off at 20321 SW Birch Street, Suite 200, Newport Beach, CA.

Since 2006, Soles4Souls has diverted 23.8 million pounds of shoes and clothes from landfills and instead created meaningful economic opportunities and helped provide new shoes for those in need around the globe. “Donating unwanted shoes not only helps people in need, but helps sustain the Earth. I am proud to assist this great organization in its laudable mission,” said Robert J. McKennon, founder of McKennon Law Group PC.

Soles4Souls aims to eradicate extreme poverty by 2050. Children every day are prevented from attending school and adults are unable to work as walking becomes unbearable, which perpetuates the cycle of poverty. To date, Soles4Souls has collected and distributed more than 30 million pairs of shoes to those in need in 127 countries around the world and all 50 states in the U.S.

“Businesses and individuals that host donation drives for Soles4Souls help us fulfill our mission by providing short-term relief and long-term solutions to global poverty,” said Buddy Teaster, Soles4Souls President and CEO. “Your used shoes act as a resource to help entrepreneurs in developing nations start and sustain small businesses to help themselves and their families step out of poverty.”

For more information about getting involved with Soles4Souls or to become an official drop-off location, visithttps://soles4souls.org/get-involved/.

About Soles4Souls

Soles4Souls is a not-for-profit global social enterprise committed to fighting poverty through the collection and distribution of shoes and clothing. The organization advances its anti-poverty mission by collecting new and used shoes and clothes from individuals, schools, faith-based institutions, civic organizations and corporate partners, then distributing those shoes and clothes both via direct donations to people in need and by provisioning qualified micro-enterprise programs designed to create jobs in poor and disadvantaged communities. Based in Nashville, TN, Soles4Souls is committed to the highest standards of operating and governance and holds a four-star rating with Charity Navigator.

About Robert J. McKennon, McKennon Law Group PC

Robert J. McKennon represents individuals and small-to-large corporations in sophisticated litigation matters in state and federal court. He has an AV Preeminent rating from Martindale-Hubbell and a “Superb” Avvo rating. He has been awarded the Super Lawyer designation every year since 2011. Practice areas of McKennon Law Group PC include bad faith insurance, disability insurance, life insurance, ERISA/employee benefits, health insurance, long-term care, property and casualty insurance, directors and officers liability insurance, professional liability insurance, insurance agent and broker liability, business litigation and unfair competition and unfair business practices. For more information, please call(949) 387-9595, or visithttps://mslawllp.com.

About the NALA™

The NALA offers small and medium-sized businesses effective ways to reach customers through new media. As a single-agency source, the NALA helps businesses flourish in their local community. The NALA’s mission is to promote a business’ relevant and newsworthy events and achievements, both online and through traditional media. The information and content in this article are not in conjunction with the views of the NALA. For media inquiries, please call805.650.6121, ext. 361.

Often times, disability insurers rely upon a common set of arguments and use common tactics to deny valid claims for disability insurance benefits. For instance, disability insurers will often have a claimant’s records analyzed by consulting physicians who challenge the opinions and diagnoses made by a claimant’s treating physicians, criticize the symptoms reported by claimants and demand objective evidence of complaints that are inherently subjective in nature, and cherry-pick portions of the record in order to downplay a claimant’s symptoms and claim that the available evidence does not support disability. Additionally, disability insurers will often deny claims for disability benefits after initially approving them without demonstrating any improvement in a claimant’s condition, and will also ignore determinations that an individual is disabled made by the Social Security Administration (“SSA”) and state disability agencies. A recent decision by a court in the Northern District of California addressed many of these arguments proffered by disability insurance providers and clarified that disability insurers cannot rely solely upon unsupported allegations.

In Gallegos v. The Prudential Insurance Company of America, 2017 WL 2418008, (N.D. Cal. June 5, 2017), Ms. Gallegos was diagnosed with lupus and was forced to stop working as a manager of a pharmaceutical company due to severe fatigue and headaches with eye pain and facial numbness. Ms. Gallegos’ neurologist determined that she suffered from chronic headaches that prevented her from working, and while her lupus directly manifested as headaches, she continued to have disabling migraine headaches which were distinct from her lupus induced headaches. Prudential approved Ms. Gallegos’ claim for short term disability benefits, and subsequently approved her claim for long-term disability benefits determining that based upon a clinical review, she was totally disabled from her occupation. However, after approximately two months, Prudential terminated her long-term disability benefits based upon a report prepared by its consulting physician who determined that Ms. Gallegos was not disabled because her fatigue had not resulted in any accidents, and her positive test for lupus could not explain the bulk of her symptoms.

Ms. Gallegos appealed Prudential’s decision to terminate her claim for disability benefits and included a functional capacity evaluation that found her range of motion to be far below normal, and she also included a vocational review that revealed she had significant typing limitations, discomfort, fatigue, and concentration difficulties. Prudential subsequently had two additional physicians review Ms. Gallegos’ records, and both determined that she was not disabled. One of the reviewing physicians did not believe Ms. Gallegos had lupus despite the diagnosis from her treating physician. While Prudential was reviewing Ms. Gallegos’ appeal, the SSA determined she was disabled and awarded her disability benefits. Prudential later denied Ms. Gallegos’ appeal of its decision to terminate her disability benefits, claiming her file did not support a diagnosis of lupus as there was no record of lupus anticoagulant in her blood, and noting that there was no documented neurological examination. Ms. Gallegos submitted a second appeal to Prudential providing lab results revealing lupus anticoagulant in her blood test and also including a report by an independent psychologist appointed by the SSA diagnosing her with Cognitive Disorder due to lupus. Prudential upheld its denial of Ms. Gallegos’ disability benefits, arguing the lupus anticoagulant did not establish disability and the records did not contain documentation of falls, coordination dysfunction, or use of assistive walking devices.

The District Court found that the medical file available to Prudential did indicate Ms. Gallegos was disabled. The Court noted that the prior approval of Ms. Gallegos’ disability benefits by Prudential constituted relevant evidence as to whether she was disabled. The Court expected Prudential to provide some evidence of a change in circumstances regarding Ms. Gallegos’ condition as its previous finding of disability weighed in favor of Ms. Gallegos. The Court criticized Prudential’s failure to consider Ms. Gallegos’ self-reported symptoms, noting that courts have rejected attempts to ignore self-reported symptoms. The Court also noted that there are certain syndromes, such as chronic fatigue syndrome and fibromyalgia, for which there are no specific diagnostic tests exist, and Prudential’s failure to specify what types of objective evidence it is looking for indicates that such objective evidence demonstrating Ms. Gallegos’ migraines and inability to concentrate might not exist. The Court similarly criticized Prudential’s failure to take Ms. Gallegos’ medication side-effects and work stress into account, since both of these factors contributed to her disability, and noted that the failure to consider the cumulative effect of these issues weighed against Prudential’s decision.

The Court ultimately determined the opinions of Ms. Gallegos’ treating physicians were probative and emphasized that Prudential ignored these opinions. The Court criticized the fact that Prudential directly contradicted Ms. Gallegos’ treating physicians without any adequate explanation of the reason for the contradiction. With regard to Ms. Gallegos’ award of benefits from the SSA, the Court noted that while the standards to be followed by the SSA differ from those of Prudential, the SSA’s decision indicates that Ms. Gallegos bears some restriction in her capability to work and, while not dispositive, it does help her show that she is disabled.

This is a strong decision for ERISA plan participants who are disabled due to diagnoses that rely heavily upon subjective complaints and do not have specific objective criteria for diagnosis. It is also an important decision for claimants who were previously receiving disability benefits and were then denied benefits without a change in their condition, claimants who have been approved for Social Security Disability payments but denied their disability benefits from their disability insurer, and claimants who have been denied benefits based upon the opinions of reviewing physicians who ignored the opinions of the claimant’s own treating and examining physicians or contradicted these opinions without adequate explanation. It is important to remember that Ms. Gallegos appears to have had strong evidence supporting her claim for disability benefits, and the cumulative effect of this evidence is what led the court to find that she was disabled.

The McKennon Law Group PC periodically publishes articles on its Insurance Litigation and Disability Insurance News blogs that deal with frequently asked questions in insurance bad faith, life insurance, long-term disability insurance, annuities, accidental death insurance, ERISA and other areas of law. To speak with a highly skilled Los Angeles long-term disability insurance lawyer at the McKennon Law Group PC, call (949)387-9595 for a free consultation or go to our website at mslawllp.com and complete our free consultation form today.

If you purchased an individual life insurance policy, as opposed to an employer-sponsored policy, the Employee Retirement Income Security Act (“ERISA”) will not apply to your claim. Instead, separate principles of contract law govern your claim, including “insurance bad faith.” Insurance bad faith litigation, as opposed to ERISA, allows a life insurance beneficiary’s recovery for damages beyond policy benefits. In this article, we discuss insurance bad faith in the specific context of life insurance policies. First, we briefly explain insurance bad faith and next we discuss the top five ways insurers commit insurance bad faith: improper attempts to rescind the policy, unreasonable delay in paying the claim, improper lapse of the policy, misrepresentation of the policy provisions and improper reliance on the policy exclusions.

What is Insurance Bad Faith?

Implied in every insurance contract is a promise of “good faith and fair dealing,” which means that the insurer must not harm the insured’s rights to receive benefits under the policy. To comply with its promise to act in good faith, the insurer must adhere to certain duties, such as the duty to adequately and accurately communicate with the insured. An insurer acts in bad faith when it fails to meet those duties unreasonably and without proper cause. Determining whether there has been bad faith conduct is important, in part, because it directly affects the insured’s potential recovery. If the insurer is found to have acted in bad faith, the insured may have access to a substantial additional recovery, including emotional distress, consequential and punitive damages.

1) Improper Attempts to Rescind the Policy

Most life insurance policies have a two-year incontestability clause. After two years that the policy is in force, an insurer may only be able to rescind a policy based on material misrepresentations made on insurance application. Often an insurer will, instead of investigating reasons to approve a valid claim, spend its time investigating ways to cancel or rescind the policy. For example, if a life insurance policyholder dies and the beneficiary submits a claim, the insurer may conduct an investigation into the insured’s medical history at and prior to the time of the application. If the insurer finds what it characterizes as material misrepresentations it will often attempt to rescind and cancel the policy so that it will never have to pay a death benefit claim. To the extent that the insurer is only conducting the investigation to avoid paying death benefits or is representing immaterial facts as material, it has likely acted in bad faith. There are many ways that only very experienced life insurance attorneys can defend against such actions. If the insurer did not act reasonably or with proper cause in denying the claim, the insurer may be subject to significant bad faith damages.

2) Unreasonable Delay in Paying the Claim

After a beneficiary makes a claim for life insurance the insurer will begin its own investigation into the claim. At this point, the insurer may request additional records regarding proof of death, payment of policy premiums, the insured’s medical history or other records regarding the application for the policy. The insurer must balance competing objectives: on one hand, its duty to conduct a thorough review and on the other, not to unreasonably delay. The “reasonableness” of an insurer’s delay may revolve around whether a “genuine dispute” as to coverage or the amount of coverage, exists and the evaluation of this will be focused on whether the delay in paying the claim was unreasonable given all of the underlying circumstances giving rise to the delay. However, the insurer must reach this position in good faith and this does not include an improper investigation to retroactively rescind the policy.

3) Improper Lapse of the Policy

Most insureds pay regular monthly premiums for years without a problem. Occasionally, in the last few months of the insured’s life, the insured may be so ill that she uncharacteristically fails to pay the monthly premium. In this unfortunate situation, it does not matter that the insured has paid premiums faithfully for many years. If the insured misses those last few premium payments, the insurer will lapse the policy. However, California recognized this problem back in 2012 and so it enacted a statue that would protect the insured from this situation. Accordingly, under California law, an insurer is required to adhere to certain notice and grace period requirements before it can lapse a life insurance policy for nonpayment of premium. If the insurer fails to adhere to those requirements, then it will not only have to pay the life insurance claim because the policy will not have been properly lapsed, but also the insurer will have likely committed insurance bad faith.

4) Misrepresentation of the Policy Provisions

Occasionally, an insurer may improperly interpret the policy as including terms, provisions or requirements for coverage not clearly outlined in the policy. Misrepresenting relevant coverage provisions to the insured can give rise to a claim for insurance bad faith. Sometimes the agent is the culprit regarding such misrepresentations. We have seen several situations where the agent that sold the insured the policy at issue misrepresented the relevant coverage provisions to the detriment of the insured. In those instances, California law requires that insurers do not deny coverage based on an agent’s negligent misrepresentation of those coverage provisions. When insurers ignore their agent’s statements regarding coverage, they may commit bad faith.

5) Improper Reliance on Policy Exclusions

Life insurance policies always contain exclusions from coverage. They essentially take away coverage from the insuring clause and provide what is not covered. These exclusions are worded so as to encompass many possible scenarios which result in non-coverage of a life insurance claim. Exclusions are often ambiguous and life insurers use them routinely to deny claims. Exclusions may include dangerous activities such as skydiving and mountain climbing. They may also include suicide or death in the commission of a crime. If, for example, an insurer conducted an unreasonable and inadequate investigation of a death claim and concluded that the insured’s death was a suicide when the reasonable evidence suggested the death was not the result of a suicide, a life insurer will likely have engaged in a bad faith life insurance claim denial.

If your claim is governed by insurance bad faith, you may be entitled to substantial, additional compensation for suffering caused by a wrongful denial. Having an experienced disability, health and life insurance attorney matters to the success of your insurance matter. If your claim for health, life, short-term disability or long-term disability insurance has been denied, call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.

The Employment Retirement Income Security Act of 1974, otherwise known as ERISA, protects employees from unanticipated losses in retirement or pension plans. As we have discussed in several articles on the topic, ERISA safeguards such plans by establishing strict protections and requirements on the administration of most employer-sponsored health, disability, life, retirement and other employee benefits plans. However, ERISA does not govern all employer-sponsored benefit plans. In general, ERISA carves out exemptions for those plans established or maintained by a government or church entity.

Just a few days ago, in Advocate Health Care Network v. Stapleton, the United States Supreme Court determined a significant question affecting pension plans run by church-affiliated hospitals. As we predicted months ago, the Supreme Court reversed, applying the ERISA exemption to pension plans maintained by a church-affiliated organization, regardless of who established the plan. In this article, we briefly cover the Supreme Court’s decision, including the issue the Court addressed, the basic facts underlying the lawsuit, its procedural history and the Court’s rationale in its decision.

Advocate Health Care Network v. Stapleton

As noted above, ERISA’s protections do not apply to all employers and it specifically exempts “church plans” as those established or maintained by a church or church-affiliated organization. Initially, ERISA only exempted those employer-sponsored plans that were both established and maintained by a church. Later, Congress changed the definition of what qualified as a “church plan” to include plans maintained by a church or church-affiliated organization whose principal-purpose was to administer a plan for the employees of a church (referred to as a “principal purpose organization”). In the Supreme Court’s recent decision, the Court addressed just that issue: whether the entity’s religious affiliation qualified it as a church plan exempt from ERISA.

The lawsuit began when plaintiffs sued their former employer, Advocate Health Care Network (“Advocate”), on the basis that it breached a fiduciary duty under ERISA. By way of brief background, Advocate operates several hospitals and treatment centers across northern Illinois and has a history as a religiously affiliated organization. Advocate began as the result of a merger between two religious-affiliated hospital systems and, post-merger, Advocate continued its religious affiliation through contracts with the church and its affirmation of the church’s ministry. Accordingly, Advocate argued that, because of its religious affiliation, it qualified as a church organization. Thus, the pension plan it offered its employees was not subject to ERISA’s requirements.

The trial court found in favor of plaintiffs, determining that the pension plan did not fall within the exemption for “church plans” under ERISA, in part, because Advocate did not qualify as a church-affiliated organization. On appeal, the U.S. Court of Appeals for the Seventh Circuit agreed. Similar decisions from the Ninth and Third Circuits were consolidated before the Supreme Court in Advocate Health Care Network v. Stapeleton. The Supreme Court reversed and in a unanimous opinion decided that Advocate qualified as a church-affiliated organization exempt from ERISA.

In explaining the rationale supporting its decision, the Court relied on consistent interpretations made by the three federal agencies responsible for ensuring compliance with ERISA: the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation. Those agencies interpreted the change in ERISA to include any plan maintained by a principal purpose organization, regardless of whether the plan was originally established by a church. The Court also pointed out that, such an interpretation of the amended statute was consistent with ERISA’s plain language and general principles of logic. Ultimately, the Court used these, and other principles, to determine that a “church plan” includes those maintained by a principal purpose organization, regardless of whether a church originally established the plan.

The decision was unanimous absent newly-appointed Justice Neil Gorsuch, who did not participate in the decision-making because he was not present when the decision was argued before the Court. However, while Justice Sonia Sotomayor agreed, she wrote a separate opinion to express concern that the interpretation was made based on such a limited legislative record. In this concurrence, Justice Sotomayor noted that, despite their relationship to churches, several of these organizations operate for-profit subsidiaries that employ thousands of employees, earn billions of dollars in revenue and compete in a market with companies that must bear the cost of complying with ERISA. Accordingly, these organizations may not be the organizations Congress originally envisioned when it amended ERISA in 1980.

Of course, determining whether ERISA applies to a claim is a significant first step in pursuing a wrongfully denied claim. As the above suggests, it can be a complex issue and having an experienced attorney matters. If your claim for retirement, health, life, short-term disability or long-term disability benefits has been denied, you can call (949)387-9595 for a free consultation with the attorneys of the McKennon Law Group PC, several of whom previously represented insurance companies and are exceptionally experienced in handling ERISA and Non-ERISA insurance claims.

If you purchased an individual disability insurance policy, the Employee Retirement Income Security Act (“ERISA”) will not apply to your claim. Instead, separate principles of contract law govern your claim, which includes what is often referred to as “insurance bad faith.” Litigation of an insurance bad faith claim, as opposed to an ERISA claim, is different in part because it may allow the insured to recover damages beyond policy benefits, such as emotional distress damages. This article briefly explains “insurance bad faith,” before discussing the top five ways insurance companies commit insurance bad faith: unreasonable delay, cherry-picking evidence, dishonest selection of experts, failing to fully inquire into all bases for coverage and engaging in coercive claims handling practices.

What is Insurance Bad Faith?

In California, every contract contains an implied promise of “good faith and fair dealing.” In the insurance context, this means that the insurer must not injure the insured’s rights to receive benefits under the insurance policy. To comply with its promise to act in good faith, the insurer must adhere to its duties despite its position of power over the insured. This entails a duty to conduct a thorough, unbiased investigation of the insured’s claim. It also includes a duty to properly inform the insured, through accurate and reasonable communication. An insurer acts in bad faith when it unreasonably and without proper cause fails to meet its obligations. Because of bad faith conduct, the insurer may be liable for additional damages beyond past-due and future benefits. Depending on the nature of the conduct, the insurer may also be liable for punitive, financial or emotional distress damages exceeding the amount of the disability benefits alone.

1) Unreasonable Delay

After an insured makes a claim for disability insurance, the insurer will begin its own investigation into the claim. At this point, the insurer may request medical records, review occupational requirements, conduct surveillance or hire additional physicians to review the claim. On one hand, the insurer must comply with its duty to conduct a thorough review of the claim, and of course, this takes a considerable amount of time. On the other, the insurer must not unreasonably delay in reviewing a claim, as doing so gives rise to bad faith liability. An insurer’s delay is reasonable if it is due to the existence of a “genuine dispute” as to coverage or the amount of coverage, but the insurer must reach this position reasonably and in good faith. Arguably, the insurer has not engaged in reasonable delay where the delay results from “doctor shopping,” or cycling through experts to get an opinion that supports denial of disability benefits.

2) Cherry-Picking Evidence

Likewise, hiring an expert will not automatically insulate an insurer from a bad faith claim based on a biased investigation. One common way an insurer may act in bad faith in handling a disability insurance claim is by “cherry-picking” the medical evidence in a way that favors the interests of the insurer over the interests of the insured. For example, let’s say that an insurance company hired five doctors to examine the insured and/or review his or her medical records, some of who are employed by the insurer. Then, say, four of the doctors support the insured’s claim for disability and one does not. If an insurer “cherry-picks” the evidence and relies on the single outlier over the four other opinions in support of the insured’s claim for disability, the insurance company may have acted in bad faith.

3) Relying on Biased or Unreasonable Peer Reviews

An insurer may also act in bad faith by dishonestly selecting experts or when the insurer’s experts were, themselves, unreasonable. Often, an insurer will employ a physician to do a paper, not in-person, review of the insured’s disability. After a review of the medical records, the paid “peer review” physician will render an opinion on whether the insured’s disability prevents the insured from performing the duties of his or her occupation. However, while the insurer may represent these peer review physicians as “independent medical examiners” that is usually only technically true, as the person is not an insurance company employee. However, typically, peer review physicians have a history of working with the insurer, which suggests that the physician may be inclined to render an opinion in favor of the insurer over the insured. That way the insurance company will continue to hire that physician to perform “independent” reviews. In other cases, the insurer’s experts may be, themselves, unreasonable, which can occur in situations where the opinion itself was unnecessarily limited or based on an incomplete review of the medical evidence.

4) Failing to Fully Inquire into Possible Bases for Coverage

As noted above, the insurer must conduct a thorough and balanced investigation, but this investigation should not (as it often appears) be considering possible bases to deny coverage. Instead, the investigation should be focused on possible bases for coverage. Accordingly, an insurer may act in bad faith by failing to properly investigate the insured’s claim, which may result from a failure to adequately inquire into all possible bases to support coverage. Once such a situation is when the insured suffers from several disabling conditions, but the insurer fails to consider one entirely. For example, the insured may suffer from a debilitating neurological disorder, but also have degenerative disc disease. Under these circumstances, if the insurer denied disability benefits based solely on the neurological disorder, then it may have acted in bad faith for failing to investigate degenerative disc disease as another potential source for coverage.

5) Coercive Claims Handling Practices

In some, more extreme cases, courts find bad faith where the insurer engages in other types of coercive claims handling practices, such as threatening to rescind a policy or threatening insurance fraud without evidence to back up the claim. For example, if the insurer threatens to rescind a policy without grounds for doing so to coerce the insured to accept a disadvantageous settlement, the insurer has acted in bad faith. Fletcher v. Western National Life Ins. Co., 10 Cal.App. 3d 376, 392 (1970). Similarly, accusing the insured of insurance fraud without evidence to back up the charge constitutes bad faith. Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 575–576 (1973).

In the May 25, 2017 edition of the Los Angeles Daily Journal, Robert McKennon and Joseph McMillen of the McKennon Law Group PC published an article entitled “Decision Marks the End of an Era for Employee Benefit Plans,” about a new Ninth Circuit case.In the article, Mr. McKennon and Mr. McMillen explain that the case makes void and unenforceable “discretionary clauses” in insurer-funded employee benefit plans providing disability and life coverage to California residents.The decision will lead to a de novo standard of review in most ERISA actions, which is quite favorable for claimants. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 2017 DJDAR 4376 (May 17, 2017).

The article is posted below with the permission of the Los Angeles Daily Journal.

By Robert J. McKennon and Joseph S. McMillen

Long-term disability insurers and life insurers frequently include clauses in their insurance policies affording them complete discretion to decide whether the claimant is eligible for the policy’s benefits, to decide the amount, if any, of benefits to which they are entitled, and to interpret the policy’s terms how they see fit. Employers and their claims fiduciaries (i.e., the insurers) regularly include these same types of “discretionary clauses” in their employee welfare benefit plan documents, and if the insurer is the funding source of the plan’s benefits, the inherent conflict of interest becomes readily obvious.

Employee benefit plans and the corresponding group insurance policies that fund them are governed by the Employee Retirement Income Security Act of 1974 (ERISA), codified at 29 U.S.C. Section 1001 et seq. The result of these discretionary provisions in ERISA cases, until recently, has been that a federal court reviewing the insurance company’s claim decision had to give deference to whatever the insurer decided, even if the court disagreed with the insurer’s decision, unless the insurer abused its discretion by acting arbitrarily and capriciously. The district court was required to apply an “abuse of discretion” or “arbitrary and capricious” standard of review rather than a de novo standard (where no such deference to the insurer’s decision is given). The former standard is more difficult than the latter for an insured to meet. While a district court applying an abuse of discretion standard to the insurer’s claim decision is not required to “rubber stamp” it with no oversight, its ability to overturn the decision is far more limited than when reviewing the insurer’s decision de novo.

On Jan. 1, 2012, no doubt aware of this potential for abuse by insurers, the California Legislature decided to put an end to discretionary provisions in disability and life insurance contracts. It enacted California Insurance Code Section 10110.6, which made void and unenforceable any grant of discretionary authority to an insurer or agent of the insurer in “a policy, contract, certificate, or agreement” that provides or funds disability or life insurance coverage for California residents. More than a dozen states have similar laws. Several of these states banned or limited discretionary clauses in response to notorious examples of insurers who, to boost their profits, intentionally used discretionary clauses to repeatedly deny claims they knew were valid.See, e.g.,Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008).

Despite California’s statutory ban on insurer discretionary clauses, group disability and life insurers have steadfastly challenged the statute’s application to ERISA-governed policies and related employee welfare benefit plan documents. They routinely argue that ERISA preempts the statutory bans on insurer discretionary clauses and that the statutory ban applies just to insurance policies but not plan documents. Their arguments have been repeatedly rejected by most California federal district courts.

On May 11, the 9th U.S. Circuit Court of Appeals, inOrzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 2017 DJDAR 4376, put the final nail in the coffin for grants of discretionary authority to insurers in ERISA-governed insurance policies and employer plan documents. In that case, The Boeing Company offered its employees long-term disability coverage through an ERISA-governed plan. Boeing arranged a group disability insurance coverage through Aetna Life Insurance Company to fund the plan’s disability benefits and vested Aetna with discretion to decide the merits of benefit claims. The plan documents granted it discretionary authority to “review all denied claims,” “determine whether and to what extent employees and beneficiaries are entitled to benefits,” and “construe any disputed or doubtful terms of the policy.” The plan further specified that, “Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously.” Boeing’s principal plan document, The Boeing Company’s Master Welfare Plan, similarly contained a broad grant of discretionary authority delegated to Aetna which included the power to “determine all questions that may arise including all questions relating to the eligibility of Employees and Dependents to participate in the Plan and amount of benefits to which any Participant or Dependent may become entitled.”

A Boeing employee, Talana Orzechowski, submitted a claim for long-term disability benefits under the plan because she suffered from physical illnesses, chronic fatigue syndrome and fibromyalgia, and could no longer perform her job duties as a result. After paying the claim for two years, Aetna decided to terminate her benefits based upon the plan’s 24-month limit for disabilities primarily caused by mental illness. Aetna determined Orzechowski’s condition was not physical, but only mental, based upon the opinions of medical consultants it hired to review her medical records. Aetna disagreed with Orzechowski’s treating physicians. They concluded that she had a physical disability and that her mental illness, depression and anxiety, were secondary to her physical problems, chronic fatigue syndrome and fibromyalgia.

Orzechowski filed suit in federal district court under ERISA to recover her disability benefits. The trial court upheld Aetna’s benefit decision. It reviewed Aetna’s decision for an abuse of discretion (because Boeing’s Master Plan gave Aetna discretionary authority), rather than de novo, the default standard in an ERISA case.

The 9th Circuit reversed, holding that the district court should have applied a de novo standard of review to Aetna’s claim decision. It ruled that California Insurance Code Section 10110.6 voided the discretionary provisions in both Aetna’s insurance policy and Boeing’s plan documents, including in the Master Plan. It remanded the case to the district court for it to review the insurer’s claim denial de novo, with instructions to focus on Orzechowski’s physical illnesses that Aetna had ignored when terminating her benefits.

The 9th Circuit first rejected Boeing’s argument that ERISA preempts the California statute. The court reasoned that while the California statute came within ERISA’s broad preemption clause, which preempts “any and all state laws insofar as they may now or hereafter relate to any employee benefit plan,” 29 U.S.C. Section 1144(a), ERISA’s savings clause saved the California law from preemption. The savings clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. Section 1144(b)(2)(A). For the savings clause to apply, the state law must satisfy a two-part test set forth inKentucky Association of Health Plans v. Miller, 538 U.S. 329, 342 (2003). First, the state law must be specifically directed toward entities engaged in insurance, and second, the law must substantially affect the risk pooling arrangement between the insurer and insured. TheOrzechowskicourt held the California statute meets both prongs of theMillertest, “regulates insurance,” and, therefore, is saved from ERISA preemption.

The court rejected Boeing’s other arguments that Section 10110.6 did not void the discretionary clause in the Master Plan because it (1) only voids discretionary clauses in insurance policies but not in employer plan documents, and (2) is not retroactive and became effective on Jan. 1, 2012 after the Jan. 1, 2011, Master Plan. The court reasoned the California statute, by its terms, covers not only “policies” that provide or fund disability insurance coverage but also “contracts, certificates, or agreements” that do so. It cited to 9th Circuit precedent holding that an ERISA plan is a “contract” and concluded Boeing’s Master Plan fell under Section 10110.6, not just Aetna’s policy.

The court rejected Boeing’s second argument because the California statute, while not retroactive, voids discretionary provisions in any policy “or contract” that renews after the statute’s effective date of Jan. 1, 2012. The statute defines “renewed” as “continued in force on or after the policy’s anniversary date.” The policy’s anniversary date was Jan. 1, 2012, and the Master Plan continued in force thereafter. The Master Plan, a contract, thus “renewed” after the statute’s effective date.

Conclusion

WhileOrzechowskimarks the end of an era that had allowed discretionary clauses in insurer-funded employee benefit plans providing disability and life coverage to California residents, there is still an open question whether California’s statutory ban will be extended to self-funded plans.Orzechowskidid not reach that issue. Many large employers fund their benefit plans. Thus, even afterOrzechowski, employers and their self-funded plans will continue to argue California’s ban does not apply to them. One thing we know for certain based on the 9th Circuit’sOrzechowskidecision: Discretionary clauses are void and unenforceable in insurer-funded ERISA employee benefit plans providing disability or life coverage for California residents, whether the clause appears in the insurer’s group policy, the employer’s separate plan document or both. Federal judges will thus have to apply a de novo standard of review more favorable to claimants in insurer-funded ERISA plans. This will lead to better results for claimants in litigated cases and, potentially, less claim denials from group disability and life insurers in the first instance.